The £2.5bn (€2.9bn) pension fund for Worcestershire County Council has implemented a structured equity protection strategy for its £1.2bn passive equity portfolio.

The strategy is intended to protect the local authority fund – part of the Local Government Pension Scheme (LGPS) – from a downturn in the equity markets while still allowing it to benefit from gains over an 18-month period.

It was applied to the fund’s portfolio of UK, US and European stock investments, which is passively managed. River and Mercantile Derivatives was appointed to run the position. 

According to a statement, the fund decided against derisking by moving out of equities to another asset class due to fears that this would have reduced return expectations.

An equity protection solution was deemed the most suitable way to maintain equity market exposure and reduce the likelihood of further contributions from the sponsor in 2019, when the scheme’s next triennial valuation is due. In the UK, triennial valuations are used to plan employer contribution levels.

Worcester Cathedral

Worcester Cathedral

Credit: jimmyjay

Worcestershire chose a static equity protection strategy rather than an active one. According to Sue Alexander, chief financial officer of Worcestershire County Council Pension Fund, research had shown that a static options strategy would be better value and more straightforward to implement.

Masroor Ahmad, managing director of River and Mercantile Derivatives, said that after an extended period of positive returns in equity markets to the beginning of this year, an increasing number of LGPS funds had shown interest managing the downside exposure in their portfolios while maintaining their allocation to equities. 

Mike Faulkner, CEO of River and Mercantile Group, added: “We have seen significant weakness in equity markets and a consequent rise in volatility. Our view is that we are in the ‘apprehension’ phase of the market cycle. We have been advising clients of this view and have been helping them develop plans to prepare to defend.”

Worcestershire Pension Fund is a member of LGPS Central , one of the eight asset pools that have been formed by local authority pension funds on instruction from central government.